Financial journalists will be sleeping a little easier this week. For last Tuesday, in a libel action against the Financial Times, a judge in the High Court struck out a claim for damages so massive that it might have imperilled the very future of the newspaper. The claim, brought by City stockbrokers Collins Stewart, was based on the supposed fall in the share price of the company after the article complained of was published and was found to be wholly unarguable. But, offering more general encouragement to the press, it appears clear that the courts will robustly resist clever ruses to re-inflate libel damages to their previously penal levels.

One of the saner developments in libel law over the past decade has been the marked reduction in damages awards. Once there was a bonanza in the libel courts with claimants regularly walking away with handsome fortunes. In 1987, Jeffrey (later Lord) Archer recovered £500,000 from the Daily Star over allegations that he slept with a prostitute. Similarly, in 1995, Graham Souness was awarded £750,000 from the People by a jury regarding allegations from his ex-wife (the sum was, in fact, reduced substantially when he appealed). But since then there has been a striking decline in awards in defamation cases, driven by several judicial innovations such as informing members of the jury in libel cases of the (much smaller) amounts which are customarily awarded in personal injury claims. As a result, few libel claimants nowadays recover more than £50,000 and the courts have suggested that there be an absolute limit for normal damages awards in libel actions of £200,000.

But sometimes in libel claims, particularly where the claimant is a company rather than an individual, attempts are made to circumvent these new restrictions on damages. This is because it has long been held that any claimant in a libel action can not only be compensated for the harm to his general reputation and the distress arising from the publication of the matter complained of (both of which are inherently impossible to value precisely) but also, for any proven actual out-of-pocket loss suffered because of the publication. For example, if a claimant company in a libel case can show that it lost a lucrative contract because of a defamatory allegation, it should be able to recover damages for the profit it has lost if it succeeds. Such recoveries are known in the jargon as "special damages".

Commercial entities sometimes use this principle to seek to recover huge amounts in libel actions despite the considerably more parsimonious damages regime. For example, in 2002, Oryx National Resources, an African diamond company, brought a claim for £12m from the BBC when it wrongly suggested that the company was connected to al-Qaida. The company claimed that it could show that this was the loss of profits on sales directly due to the report in question. The claim was finally settled for £500,000.

But even this substantial claim was dwarfed by the one brought by Collins Stewart against the FT. The stockbrokers sought in part to recover damages from the FT on the basis of a fall in its share price when, it argued, judged by the performance of its rivals, the share price should have risen sharply. This, the argument ran, suggested a decline in value of the company due to the article of a cool £230.5m.

There seemed a simple answer to this. The FT pointed out that the drop in the share price - even if it could be solely attributed to the FT article (which they strongly denied) - did not mean that the company had lost anything. The loss was to its shareholders who were not suing. The company, they argued, could not seek damages in respect of a loss it had not itself suffered.

Ah, responded Collins Stewart, the FT had misunderstood. It did not seek to recover the fall in share value as a loss it had suffered itself. Rather, the fall reflected a precise assessment by shareholders of the long-term damage to the company's income and profits due to the article complained of.

This suggested an absolute faith in the omniscience of those trading in the company's shares to foresee precisely the effect of the article on the company's future performance and Mr Justice Tugendhat was having none of it. He considered that the share price of a company was driven by many factors, including market sentiment, and it could not be taken as an infallible barometer of its future sales performance. Moreover, there was no guarantee that the movement in the share price was due to the article. Disentangling this factor from the myriad of other factors which might have driven the share price up or down would be an impossible task.

This is not only an encouraging decision for the media but the timing of it is significant as well. The application was made in the relatively early stages of the litigation. It would have been easy for the judge to allow the claim to stand until the damages stage of the action. That he chose to strike it out at this stage shows not only that he thought it a weak claim but also that he realised that having such a ruinous risk hanging over the newspaper and its journalists would be highly undesirable and might unduly pressure the newspaper into settling.

The FT, which is edited by Andrew Gowers, is not out of the woods yet. There remains a special damages claim - running into millions of pounds - for actual loss of sales to Collins Stewart allegedly caused by the article. If Collins Stewart succeeds in the action overall (and the FT is contesting that there is any liability), this claim will be assessed later - by a judge and not a jury - but it seems that the court will take a sceptical approach, requiring the company to prove clearly that the business it claims for was lost due to the FT article and not any of the other reporting of the company at the time. The FT's solicitor, Nicholas Alway of Farrer & Co, confirms that "the losses attributed to the FT's article in the remainder of the special damages claim are also very much disputed".

Reporting serious allegations against major commercial organisations still carries the risk that it will give rise to substantial claims in damages. But the media will be heartened that the courts appear ready to do their utmost to keep such claims within bounds.

· Dan Tench is a media partner at Olswang

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